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Dividends – Don’t forget the Franking!

Nathan Lear
Partner/Private Client Adviser
6 Feb 2011

With the reporting season upon us, many companies will be announcing their results throughout February. This gives us an opportunity to revisit the important principals that investors should look for in Australian company shares, such as the company’s ability to pay a dividend.

Income is an important component of any investment, whether its fixed interest, shares, property or cash. However, when comparing the income return from each of these asset classes, there are certain factors that we must consider to ensure we are comparing apples with apples. One such factor is the benefit of franking credits. 

To get a better understanding of a dividend, let’s compare the difference between a dividend paid by an Australian company share and income generated from cash deposits.

Cash Deposits

Cash deposits offer a fixed amount of income. The level of income will increase or decrease only if the official cash rate as set by the Reserve Bank of Australia (RBA) changes. Further to this, cash does not have the ability to grow in value.

Australian Company Dividends

A dividend is the distribution of a company’s earnings to its shareholders. The level of dividends will depend on the company’s ability to generate earnings and its dividend policy.

When making the comparison to cash deposits, an investor must include the impact of franking credits on the dividend. Franking refers to a tax credit that investors receive, in addition to the dividend, which represents tax that the company has already paid. This effectively eliminates the double taxation of dividends.

For example ANZ Banking Group pays a dividend of around 5.2% based on its current share price. However, when including the franking credit, ANZ’s income return increases to 7.4%. Compared with a high yielding cash account or term deposit, which are currently offering rates of around 6%, this is an attractive income return.

Further, shares also have a growth component. Being a growth asset, shares have the ability to fluctuate in price. While this has the potential to increase the return it also increases the level of risk.

Having said the above, when managed appropriately in accordance with your asset allocation, Australian company shares paying attractive fully franked dividends can boost the performance of your portfolio.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.